5 Reasons Your LLC Needs an Operating Agreement
A written LLC operating agreement demonstrates that an entity is separate from the member/owner. Without a written LLC operating agreement in place, the business looks like a sole proprietorship, with no liability protection. A written LLC operating agreement helps limit liability. Here's why:
REASON 1 * Keep Business and Personal Identities SeparateA written LLC operating agreement is evidence of a formal structure to the LLC. It helps distinguish the business from the owner for liability purposes. You likely formed your LLC for liability protection: the LLC protects a member from business liabilities and the business assets from a member*s personal liabilities. A written LLC operating agreement demonstrates that the entity is separate and apart from the member/owner. Without a written LLC operating agreement in place, the business looks like a sole proprietorship, with no liability protection. If a court doesn*t see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers.
REASON 2 * Comply With Your State*s RulesYour LLC operating agreement defines the parameters of your business. Your LLC is bound by the default rules of your state if you do not have a written operating agreement in place. California*s LLC Act sets out default provisions that will govern the rights and obligations of the members. Your written operating agreement will override the California default LLC provisions.
Many provisions of the California Revised Uniform Limited Liability Company Act may be varied only in a written operating agreement. This allows the member or members to customize the structure and terms of the LLC to reflect their goals and agreements.
REASON 3 * Document Your TermsFor an LLC with more than one member, clear documentation of the terms to which the members have agreed is essential. An oral agreement may lead to misunderstandings and difficulty of proof. Over time, members may have difficulty remembering even simple terms of an oral agreement. A complex oral agreement may be a lawsuit waiting to happen.
In addition, as your business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business-development opportunities. An operating agreement can define the manager role*designating the authority and compensation and what happens if the manager leaves or competes with the company.
REASON 4 * Clarify SuccessionAn operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down or closing out the books.
REASON 5 * ScalabilitySuccessful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement, the LLC will be better positioned in investment negotiations.